The mainland's shipbuilders are set to spark a price war in the oil-rig market.

With orders for new ships hitting an eight-year low last year, China Rongsheng Heavy Industries and its local rivals are moving into the offshore business, lured by a market that will reach about US$328 billion in 2017. The new entrants are lowering prices to grab contracts, hurting margins at Singapore-based Keppel and Sembcorp Marine, the world's two biggest rig makers.

"It's like moving from one bottomless pit to another," said Park Moo-hyun, an analyst at E-Trade Securities in Seoul. "Chinese shipyards are competitively trying to get into what they see as a lucrative business. But the consequence of that is they could end up distorting the whole market."

China Rongsheng, the nation's biggest yard outside state control, announced in October its first order to make a tender barge, and rival Yangzijiang Shipbuilding got its first rig contract last month. Shanghai-based China Rongsheng warned in December of a loss in 2012 after three years of profits.

Jinhai Heavy Industry, based in Zhejiang province, also secured its first offshore equipment contract last month.

"Whether or not the Chinese yards can earn money from the current orders is pretty much in the air," said Vincent Fernando, an analyst at Religare Capital Markets in Singapore. "There's a steep learning curve."

Hyundai Heavy Industries, the world's biggest shipmaker, and other Korean yards are also seeking orders for drill ships and floating production units amid rising energy demand.

The global onshore and offshore plant construction market is expected to rise to US$1.26 trillion in 2017 from US$989 billion in 2012, according to South Korea's Ministry of Knowledge Economy. The offshore oil and gas market may account for 26 per cent of that, the ministry said.

While demand for rigs has been booming, ship orders have plummeted because of excess fleet capacity and global economic uncertainties. Vessel prices have fallen as much as 27 per cent in the past two years, according to Clarkson, the world's biggest shipbroker.

About 464 shipyards in China won 18.7 million deadweight tonnes of orders worth US$14.3 billion last year, the lowest since 2004, according to Clarkson. That compares with contracts for 14.6 million tonnes worth US$29.6 billion received by 88 yards in South Korea, the world's second-biggest shipbuilding nation.

Thirty-eight per cent of yards in China did not get contracts for new vessels last year, and 10 per cent had no deliveries scheduled beyond that year-end, the London-based shipbroking unit of ICAP said last month.

That is prompting Chinese shipyards' diversification into rigs at cut-rate prices.

Yangzijiang, based in Jiangyin, announced last month it got a US$170 million order for a jack-up rig, lower than the US$205 million contract Keppel got in April for a similar product. It is an indicator of lower margins in the future, said Keppel chief executive Choo Chiau Beng.

This article appeared in the South China Morning Post print edition as Cheap mainland rigmakers to shake up market